Which moving average you use will depend on your trading and investing style and preferences. The simple moving average has a lag in comparison with its couzin, but the exponential moving average may be prone to quicker breaks. Some traders prefer to use exponential moving averages for shorter time periods to capture changes more quickly.
Some investors prefer simple moving averages over the duration of long time periods to identify long-term trend changes. In addition, much will depend on the individual security in question. A 50-day SMA might work great for identifying support levels in the NASDAQ, but a 100-day EMA may work better for the Dow Transports, for instance. Moving average type and length of time will depend greatly on the individual security and how it has reacted in the past.
The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the trade off between sensitivity and reliability. The more sensitive an indicator is, the more signals that will be given.
These signals may prove timely, but with increased sensitivity comes an increase in false signals. The less sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer and more reliable signals. Sometimes these signals can be late as well.
For moving averages, the same dilemma applies. Shorter moving averages will be more sensitive and generate more signals. The EMA, which is generally more sensitive than the SMA, will also be likely to generate more signals. However, there will also be an increase in the number of false signals and whipsaws.
Longer moving averages will move slower and generate fewer signals. These signals will likely prove more reliable, but they also may come late. Each investor or trader should experiment with different moving average lengths and types to examine the trade-off between sensitivity and signal reliability.
How would you like to discover more about the techniques successful traders use to make profitable trades?
Download them free here: Day Trading Course
Ian Jackson is an authority on Day Trading information, learning the hard way - and now he reveals how you can learn the business too, without all the growing pains.
Some investors prefer simple moving averages over the duration of long time periods to identify long-term trend changes. In addition, much will depend on the individual security in question. A 50-day SMA might work great for identifying support levels in the NASDAQ, but a 100-day EMA may work better for the Dow Transports, for instance. Moving average type and length of time will depend greatly on the individual security and how it has reacted in the past.
The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the trade off between sensitivity and reliability. The more sensitive an indicator is, the more signals that will be given.
These signals may prove timely, but with increased sensitivity comes an increase in false signals. The less sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer and more reliable signals. Sometimes these signals can be late as well.
For moving averages, the same dilemma applies. Shorter moving averages will be more sensitive and generate more signals. The EMA, which is generally more sensitive than the SMA, will also be likely to generate more signals. However, there will also be an increase in the number of false signals and whipsaws.
Longer moving averages will move slower and generate fewer signals. These signals will likely prove more reliable, but they also may come late. Each investor or trader should experiment with different moving average lengths and types to examine the trade-off between sensitivity and signal reliability.
How would you like to discover more about the techniques successful traders use to make profitable trades?
Download them free here: Day Trading Course
Ian Jackson is an authority on Day Trading information, learning the hard way - and now he reveals how you can learn the business too, without all the growing pains.
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